Business objectives Flashcards
Total revenue formula
TR = P x Q
Average revenue formula
AR = TR/Q
Average revenue curve
Downwards sloping
D = AR
Marginal revenue
The additional revenue a firm makes by selling one extra unit
Total revenue curve
Increases as MR is positive, decreases as soon as MR is negative.
Total revenue
The area of a chosen point of the AR curve, under the demand curve
What happens to TR when demand is elastic and there is an increase in price?
Demand decreases by a more than proportional increase in price. TR decreases
How does PED change as price decreases along the AR curve?
Elastic -> unitary elastic -> inelastic
Where is revenue maximised?
And why?
MC = 0
- Firms may also maximise revenue in order to increase output and benefit from economies of scale
- In short term firms may use this strategy to eliminate the competition as the price is lower than profit maximisation point
Short run
When at least one factor of production is fixed
Long run
When all factors are variable, there are only variable costs
Variable costs
Exists in the LR and SR. Vary with output. E.g wages
Fixed costs
- Only in short run
- Don’t vary with output. E.g capital, salaries
Total cost formula
TC = TVC + TFC
Average fixed cost formula
AFC = TFC/Q
Marginal cost
Additional cost of selling one extra unit
Marginal cost formula
MC = Change in TC/Change in quantity
What happens to marginal cost when productivity increases?
Marginal cost decreases
Diminishing marginal returns
In the short run as more FOP are employed, initially productivity will increase but productivity will eventually diminish
Average variable cost formula
AVC = TVC/Q
Average total cost formula
ATC = TC/Q or AVC + AFC
What are the 6 types of internal economies of scale?
- purchasing economies
- technical economies
- managerial economies
- marketing economies
- financial economies
- risk bearing economies
Purchasing economies
Larger firms are able to negotiate much lower prices through bulk buying. Reduce their LRAC
Technical economies
Larger firms can invest on specialist capital to increase productivity